An Investment Case Study On Warren Buffett's Occidental Petroleum Bet

Why did Buffett purchase this oil stock? We analyze this question by an interesting case study.

Warren Buffett's Berkshire Hathaway now owns close to 15% stake in the company.

Recently, Warren Buffett's Berkshire Hathaway purchased 18.1 million shares of Occidental Petroleum Corp, the US oil giant.

There's an interesting investment case study behind this. Here goes…

Buffett's Berkshire Hathaway now owns close to 15% stake in the company and currently ranks as its 8th biggest stock holding. 

Interestingly, Buffett also owns stake worth $ 6 billion in Chevron, another oil giant.

Clearly, Buffett energy bets are perplexing. Especially against the backdrop of a world that will be powered by green energy. Does Buffett not believe in the concept of reducing carbon emissions or are we missing something?

Luckily for us, Buffett was asked the very same question at last year's Berkshire AGM. Here's what he had said.

"I would say that people that are on the extremes of both sides are a little nuts. I would hate to have all hydrocarbons banned in three years, or you wouldn't want a world that, it wouldn't work. And on the other hand, what's happening will be adapted to, over time, just as we've adapted them to all kinds of things."

That's a perfectly rational reply in my view, something you've come to expect from a legend like Buffett.

Buffett argues that you can't have a hydrocarbon free world in three years. Likewise, green energy can't become the dominant source in a few years. The transition will take time.

Thus, if investors are going ga-ga over green energy stocks and assigning them crazy multiples, you should stay away from such stocks.

Similarly, if investors are becoming negative about energy stocks and dumping them to levels where they become attractive valuations wise, you can consider investing in them.

This is exactly what seems to have happened to Occidental Petroleum. Thus, Buffett saw an opportunity and snapped up the company's shares.

The way stocks like ONGC and Oil India have moved over the past few months, looks like Buffett's mantra would have worked in India as well.